The only way to meaningfully reduce health care costs is to make people more sensitive to them.
Do you know how much your health care cost last year? Probably not — almost no Americans do. And that, ironically, is the primary reason that health care costs are so high. Yet debates over health care policy tend to overlook this.
Republicans in Congress are currently learning the hard way that health care remains a top-of-mind issue for many voters. Democrats are on the offensive, fighting to renew enhanced premium subsidies for Obamacare’s individual market, which were created during the Covid-19 pandemic to mask the true cost of the program’s insurance policies. They were initially sold as an emergency measure, but millions of enrollees came to depend on them. If the subsidies expire at the end of the year, those enrollees will now have to pay the actual price of Obamacare to maintain coverage, which will mean exposing them to thousands of dollars more in costs.
As Republicans have rightly noted, extending the ACA subsidies is terrible policy on the merits. If they are extended this year, it is unlikely they would ever expire. Making them effectively permanent would add at least $350 billion to the national debt over the next decade, according to the Congressional Budget Office. Democrats are proposing no budgetary offsets. Most of the money flows to enrollees well above the poverty line, as subsidies to lower-income enrollees that were part of the original Obamacare program would remain. The subsidies mainly crowd out private health care spending by individuals and employers. And they’re rife with fraud; 35 percent of marketplace enrollees make zero claims in a year, even for routine or preventative care, and billions of dollars flow to policyholders whose incomes are unverified.
Nevertheless, Republicans are losing the political argument against the subsidies — so much so that a handful of so-called GOP moderates are joining with Democrats to force a vote on extending them. The stubborn fact remains that many Americans will pay more for health insurance if taxpayers stop subsidizing their plans, and rising costs are already the most prevalent health care concern in the country. Republicans have failed to coalesce behind an alternative proposal. Their most viable plan is to redirect the subsidies from insurance companies to individuals in smaller amounts.
To different extents, the prerogative of both parties is to keep pouring money into a health care system that is fundamentally dysfunctional. Neither wants to pursue the structural changes that could make insurance less costly, reducing the need for taxpayer subsidies of any kind to make them remotely affordable.
By contrast, conservative health policy experts outside government have numerous proposals to improve the individual market that the ACA broke. Insurance could be deregulated so healthy people would be free to buy less comprehensive plans with cheaper premiums that fit their actual medical needs. Patients with preexisting conditions could be subsidized directly and separately, not forced into the same risk pool as healthy people, which pushes up premiums for everyone.
These and other market-oriented reforms are all worthwhile, and they are ultimately necessary to resolve the ACA’s many distortions of the individual marketplace. Yet even they do not address the root of the problem, which is that health care costs too much money to begin with. Merely redistributing the burden of health insurance claims does little to change this fact.
As of 2023, the United States spent $14,570 on health care per person, or 17.6 percent of gross domestic product — significantly more than any other country. Differences in health care utilization do not fully explain why Americans spend so much more, as, in many cases, we consume health care at similar rates to other wealthy countries. Rather, the overwhelming cause of our exceptional health care spending is our exceptional health care prices — what insurers, governments, and families pay for individual treatments. The only way to meaningfully control U.S. health care costs, therefore, is to restrain prices.
But therein lies the problem. The most effective way to reduce prices is not by imposing price controls, as we have learned time and again. It is good, old-fashioned consumer rationality. People strongly prefer to buy less expensive things so they can purchase more of what they want, and, in a functional market, that preference limits the prices that sellers can profitably charge without losing business. Price sensitivity is what is supposed to keep costs in check.
The U.S. health care sector lacks this essential feature. Virtually no one pays directly for most of the health care they consume — just 10 percent of health care spending is out-of-pocket. Instead, costs are usually covered by health insurance. Patients usually don’t even check what a new drug or a doctor’s appointment will cost before they take it. They have no incentive to do so, as they know that insurance will cover the bill, and their out-of-pocket cost, if anything, will be a small fraction of the total.
This is what economists call the “third-party payer problem.” When someone else is paying for what you consume, you tend to spend more on it, often without knowing. In the case of health care, insured patients rarely discriminate between different hospitals or doctors based on price, so providers have little incentive to limit what they charge.
Unfortunately, third-party payers are practically impossible to remove from health care, since most health care is to cope with serious illnesses and injuries that people naturally wish to insure against. No one wants to pay for major health care expenses directly, even if it means spending $80,000 instead of $100,000 on cancer treatment.
Yet America’s system of health care financing makes the third-party payer problem exponentially worse by introducing a second layer of obscured costs. Not only do Americans not pay for health care directly, but most do not pay directly for their health insurance either. Consequently, insurance providers have little reason to scrutinize medical prices either, as they can pass costs on to policyholders without them seeing it.
According to census data, 35 percent of Americans get their health insurance from the government, either through Medicare or Medicaid. These people never know what their coverage costs, and they don’t have any reason to care — taxpayers foot the bill. Over half of Americans get health coverage from their own or a family member’s employer, which is exempt from income taxes. The average employer health plan for a single worker costs $9,325 per year, but the employee contributes only $1,440. Family coverage costs $26,993, on average, but the worker pays just $6,850. The remainder is provided by the employer as part of its employees’ compensation, paid with money that would otherwise go toward higher cash wages.
Just 4.3 percent of Americans purchase health insurance directly on the ACA’s individual marketplace. Even within that tiny segment, most enrollees are not sensitive to the price of their coverage. The Paragon Health Institute notes that 83 percent of premium payments came from federal subsidies in 2024. Even if the enhanced tax credits expire next year, taxpayers will continue to fund the bulk of most enrollees’ premiums.
Across the board, nearly every American is heavily insulated from the true cost of their health coverage. Approximately half of total health care spending, or $2.3 trillion, comes from federal entitlement programs and tax expenditures. State governments pay hundreds of billions of dollars more, and employers pay another trillion or so.
Third-party payment of health insurance has been the greatest contributor to rising health care costs for almost a century. In 2001, the great free-market economist Milton Friedman identified two turning points in U.S. history when health care spending began to grow much more rapidly. The first was when the government made employer-provided health coverage tax-exempt during World War II, incentivizing workers to get health insurance through their companies rather than buy it directly. Conservative experts call this the “original sin” of U.S. health care policy. The second inflection point was when Medicare and Medicaid were created in 1965 to cover large swaths of the population, further numbing patients’ sensitivity to health care prices.
The people most hurt by this arrangement are the small portion of Americans who do not get health care through the government or their employer and must buy it directly without subsidization: the uninsured, sole proprietors, independent contractors, and others who don’t receive coverage through their work. These individuals are exposed to the inflated health care prices that everyone else is largely blind to. They have fallen through the cracks of a market that is not designed for them, like a middle-class kid trying to afford college without a student loan or financial aid.
It is this market minority that policy debates usually concentrate on, as they are the only people who confront health care prices forthrightly. But the costs of the wider health care enterprise have begun to weigh on the country. Workers face higher premium contributions and deductibles as employers struggle to manage the cost of health plans. And ballooning outlays on Medicare and Medicaid are now the principal driver of the national debt, putting it on an unsustainable trajectory.
Restructuring the individual marketplace isn’t enough to fix health care. The fundamental problem of ever-rising costs goes much deeper, and addressing it requires an overhaul of how most Americans procure health coverage.
Even worse politically, controlling health care costs requires making people more conscious of those costs. In 2008, when Republican presidential nominee John McCain boldly proposed repealing the tax exclusion for employer health insurance and replacing it with a fixed credit for individuals to purchase coverage, Barack Obama savaged his plan for foisting premiums onto families. What voters didn’t realize is that they were already paying for employee health coverage through forgone income.
Democrats’ messaging on health care is easy: throw more government money at the problem. When greater subsidization inevitably raises costs further, throw even more money. Eventually, perhaps, a system of completely socialized medicine and comprehensive price controls won’t be so frightening to voters.
Conservatives who are genuinely interested in health care reform have a much tougher argument to sell. To save Americans money on health care in the long run, people are going to have to feel as though they are spending more. It’s a bitter pill to swallow, but it might be the only cure that works.